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High Tide keeps “Outperform” rating with ATB Capital

ATB Capital Markets analyst Frederico Gomes is still riding the wave with High Tide Inc. (High Tide Stock Quote, Charts, News, Analysts, Financials TSXV:HITI), maintaining an “Outperform” rating despite lowering his target price from $13.25/share to $12/share for a projected return of 356 per cent in an update to clients on Wednesday.

Calgary-based High Tide Inc. operates as a vertically-integrated company in the cannabis market in Canada, the United States and internationally. It engages in the design, manufacture and distribution of smoking accessories and cannabis lifestyle products and is also involved in the wholesale and retailing of cannabis products and it operates and franchises licensed retail cannabis stores.

Gomes’s latest analysis comes after High Tide reported its second quarter financial results for the 2022 fiscal year.

High Tide’s revenue report was a beat at $81 million in relation to the $77.5 million projection from ATB and the $78.1 million consensus estimate, representing 12 per cent sequential growth thanks to continued brick-and-mortar footprint expansion in Canada, paired with impressive same-store sales growth of 23 per cent, to the point where High Tide is now the largest non-franchised Canadian cannabis retailer with 126 stores open, on track to meet its guidance of 150 stores open by the end of 2022.

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Meanwhile, High Tide reported gross profit of $22.7 million to slot in just behind the ATB estimate of $23 million and the consensus projection of $23.5 million, while the 28 per cent adjusted gross margin missed in relation to the ATB projection of 29.7 per cent. Similarly, the company’s adjusted EBITDA was a miss at $2.4 million compared to the consensus projection of $3.1 million and the ATB forecast of $3.2 million.

“The gross profit and adj. EBITDA miss were driven by a higher contribution from lower-margin Canadian cannabis retail sales,” Gomes said. “We expect Canadian retail to continue to increase as a proportion of sales due to the segment’s high-growth prospects.”

All told, the company ended the quarter with approximately $15 million in cash available, with High Tide management expecting to close on a $30 million credit facility in July on top of the $32 million available through its ATM facility.

“Once again, I can proudly report that High Tide continues to see consistent and significant growth year-over-year and sequentially with every passing quarter, despite a persistently challenging macro environment and the state of the capital markets,” said Raj Grover, President and Chief Executive Officer of High Tide in the company’s June 15 press release. “Our continued EBITDA positivity is a critical point for us, as we are steadily growing at the same time when many of our publicly-traded and private peers are facing fierce challenges and slowing down.”

The quarterly report has led to slight revisions in Gomes’ estimations, slightly raising his 2022 revenue estimate from $330 million to $332.1 million for a potential year-over-year increase of 83.4 per cent, with Canadian retail revenue set to take an even bigger piece of the revenue mix at 77.3 per cent ($256.7 million, previously $243.3 million). 

Looking ahead to 2023, Gomes lowered his revenue expectation from $451.6 million to $438.4 million on account of lower international revenue, though the new figure still represents a year-over-year increase of 32 per cent, while Canadian retail forecasts to hold steady at $350.4 million to account for 80 per cent of the revenue mix.

In terms of valuation, Gomes forecasts the company’s EV/Sales to dip from the reported 1.2x in 2021 to 0.6x in 2022, positioning High Tide in line with the average of its Canadian retailer peer group.

Gomes also made adjustments to his gross profit projections, lowering his 2022 estimate from $97.7 million and a 29.6 per cent margin to $92.3 million and a 27.8 per cent margin, while his 2023 projection dropped from $118.1 million to $116.6 million, though he forecasts an increase in the gross margin from 26.2 per cent to 26.6 per cent.

Similarly, Gomes has made revisions to his adjusted EBITDA expectations, dropping his 2022 forecast from $13.5 million and a 4.1 per cent margin to $11.5 million and a 3.5 per cent margin, while he raised his 2023 projection from $33.8 million and a 7.5 per cent margin to $39.1 million and a margin of 8.9 per cent.

From a valuation perspective, Gomes projects the EV/EBITDA multiple to slightly rise from the reported 17x in 2021 to a projected 18.4x in 2022, producing a slight premium in relation to the 17.5x Canadian retailer peer group average.

High Tide’s stock price has washed out to about a 53 per cent loss in 2022, unable to sustain early momentum after hitting an early peak of $7.30/share. However, it has regained a bit of its value after hitting a 2022 low of $2.24/share, producing about a 20 per cent return since.

About The Author /

Geordie Carragher is a staff writer for Cantech Letter
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